Positioning for an economic hard landing and aggressive Federal Reserve (Fed) easing next year is spreading across the US interest-rate markets.

In the cash bond market, JPMorgan Chase & Co’s Treasury client survey, conducted weekly since 1991, found that the most active investors in the market are as bullish as they’ve ever been.

In short-term interest-rate options - whose value is tied to the Secured Overnight Financing Rate (SOFR) influenced by the Fed - structures that would benefit from several Fed rate cuts by the middle of next year have been in favour. A notable one Monday targeted rate cuts totaling as much as 250 basis points by September, about 200 basis points more than what’s currently priced into the swaps market.

Meanwhile in the futures market, Commodity Futures Trading Commission data released on Monday shows hedge funds increased their net long position in SOFR futures to an all-time high in the week ended Nov 21. They’ll benefit in aggregate from an increase in the amount of Fed easing expected to occur over the coming months.

Here’s a rundown of positioning in various corners of the market:

Active clients, defined as approximately 70% speculators and 30% real money, increased their net long position to 78% in week ended Monday, a record high in the survey conducted since 1991. Among all clients surveyed, 40 to 60 in all, the net long position also increased, matching the biggest recorded since November 2010.

CME Group Inc open-interest data suggest that positions increased over the last week in SOFR March 2024 95.25 and 95.00 calls. Flows during the period included buying of the Mar24 94.75/95.00/95.25 call fly and the Mar24 94.75/94.875/95.00/95.125 call condor. Apparent liquidations included the March 2024 94.875 call, sold as part of the Mar24 94.75/94.875 call spread.

Overall open interest as of Monday’s close points to heavy positioning in the 95.00 strike, equivalent to a 5% SOFR rate, closely followed by the 94.75 strike.

CFTC data for the week ended Nov 21 showed hedge funds remain bullish in SOFR futures, where the net long position reached a new record, equivalent to about US$30 million per basis point in risk. In Treasury futures, asset managers covered the equivalent of around 76,000 10-year note contracts while hedge funds increased their net short by the equivalent of about 33,000 10-year contracts.

The cost to hedge a selloff in the long-end of the curve from current levels has fallen over the past week, as the skew on long-bond futures drifts closer to neutral from negative. Meanwhile, investors are paying a premium to hedge a further rally in the two-year and five-year note futures, prolonging the skew disparity between the front and long ends of the curve.

  - Bloomberg